Trade Deal: Will Korean Car Makers Outflank Rivals?

By James Simms

Watching your big rival move in on an old flame is just not pleasant. But that’s how it must feel for Japan’s auto industry now that the U.S. has approved a free trade deal with South Korea.

Japanese car manufacturers have seen their relationship with U.S. buyers falter recently. Seoul’s agreement with Washington, approved by Congress last week, now gives the likes of Hyundai Motor and Kia Motors another leg up in the world’s No. 2 car market. That spells even tougher times for their Japanese counterparts.

The agreement, expected to come into effect in January, will eliminate more than 90% of trade duties between South Korea and the U.S. within three years. A 2.5% tariff on imports of finished vehicles into the U.S. will be eliminated after four years, while duties on car parts will end immediately. That will give an 11% lift to South Korea’s annual auto exports to the U.S., which last year were $11.4 billion, according to a U.S. International Trade Commission study.

Japan’s auto makers should be concerned. They have already moved some production of modes sold in the U.S. to countries within the boundaries of the North American Free Trade Agreement. But cheaper cars and parts from South Korea will hurt the Japanese companies—in the first year of the pact alone, imports from Japan could drop by 7%, or about $313 million, according to the Japan External Trade Organization. The Japanese companies will likely feel the most pain on big components used in their U.S. plants. About 60% of the transmissions used in Toyota’s North American cars are imported, according to IHS Automotive; at Nissan, it’s about 40%, and at Honda, it’s about 22%.

Even before the pact comes into effect, South Korean auto makers have gained favor with U.S. buyers; their combined share of the U.S. market is 8%, up from 5% in 2008. The South Korean companies also have the added advantage of a weak currency that is in stark contrast to the ongoing strength of the yen. At the same time, Japanese car makers have lost ground because of poor model offerings, product-safety recalls and, especially, shortages of vehicles following supply-chain issues after the March earthquake. Toyota, Honda and Nissan have seen their combined share of the U.S. market fall from 34% in 2008 to 29% today.

Meanwhile, the U.S. trade deal comes after South Korea sealed a similar pact with the European Union that took effect in July. Seoul is working on another trade deal with China, which is now the world’s largest auto market by sales volume. In Japan, meanwhile, talk of such trade agreements is just that—talk. If Tokyo falls too far behind, Japan’s auto exports could look like an increasingly unattractive proposition.

Comments (2 of 2)

It means more cars from Hyundai-Kia. In Korea Hyundai-Kia has about 80 percent market share and Koreans prefer them to American cars. The only foreign cars that have significantly increased their market share is VW and the german luxury brands. I would also say that the only American brand that will gain more market share is GM because they own factories in Korea and because Korean's consider GM as Korean due to the fact that cars such as the cruze and the malibu was developed in Korea by what used to be known as GM Daewoo.

12:32 pm October 19, 2011

RickJ wrote :

So does this "free" trade agreement mean we'll be shipping more Chevys, Fords, and Dodges to Korea? Or does it mean more Hyundai's and Kia's entering the US?